Republicans charge that tax policy uncertainty is a drag on economy

With Democrats divided over tax policy, Republicans and business organizations are arguing that uncertainty about the tax code is a drag on the economy.

The GOP message comes as Democrats engage in a fierce debate over whether to allow rates on upper income households to rise next year.

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No incomes taxes have gone up, but Republicans say the mere prospect that they will is bad enough.

“Right now, America’s employers are afraid to invest in an economy stalled by ‘stimulus’ spending and hamstrung by uncertainty,” House GOP leader Rep. John Boehner (Ohio) said in an economic speech last month in Cleveland. “The prospect of higher taxes, stricter rules, and more regulations has employers sitting on their hands.”

Boehner, who would become Speaker if Republicans win control of the House in November, repeated the charge in a statement Friday responding to a monthly jobs report showing an uptick in the unemployment rate and a net loss of 54,000 jobs. He called on the White House “to help end the uncertainty for small businesses.”

The right-leaning National Association of Manufacturers also raised the uncertainty worries in a study the group released this week. “Uncertainty about looming tax hikes has stunted employment growth and until Main Street begins to hire, the unemployment rate will remain unacceptably high,” the study said.

Democrats fired back at the GOP. Nadeam Elshami, a spokesman for Speaker Nancy Pelosi (D-Calif.), said it “takes a lot of chutzpah” for Republicans to raise the issue of uncertainty about the tax code when they are opposing a bill pending in the Senate that would give tax breaks for small businesses.

“It’s such the height of political arrogance that Republicans would spend their time looking for a political issue instead of working with us on solutions for the American people,” Elshami said.

Tax cuts ushered in by President Bush and a Republican-controlled Congress in 2001 and 2003 are set to expire at the end of the year. So are low tax rates on dividends and capital gains.

Democrats want to extend most of the tax rates, but President Obama is seeking to fulfill a campaign promise by raising taxes on individuals making more than $200,000 and households with incomes above $250,0000. Obama would reinstate the 36 and 39.6 percent rates on upper-income taxpayers.

Democratic leaders in Congress back that goal, and Pelosi has ripped Republican opponents for protecting tax cuts for the rich.

Obama also wants to raise taxes on dividends and capital gains.

Other Democrats argue no tax rates should be hiked given the weak economic recovery. The Hill reported in July that Democrats in both chambers were discussing an extension of the Bush-era tax rates on upper income taxpayers given the fragile economy.

The party is also facing political pressures as the debate over tax rates coincides with the midterm election campaign. The chairman of the Democratic Congressional Campaign Committee, Rep. Chris Van Hollen (Md.), said Friday that a temporary extension of the Bush tax cuts for high-earners “can be part of the discussion.”

Still, he said an extension would not be ideal, and he criticized Republicans for pushing for a permanent extension that could increase the deficit by $700 billion.

Data this week, including a better-than-expected jobs report on Friday, suggest the economy is not at risk of a double-dip recession.

“We know from economists on all sides of the political spectrum is that is not a very efficient way to boost the economy -- that there are better alternatives,” Van Hollen said of the proposal for a short-term extension in an interview aired on the PBS show “Newshour.”

“But it seems to me the big issue here is on the Republican demand for permanent tax cuts. Because they are not saying only well let's keep this going for just one more year.”

An extension of the tax cuts for the wealthy “can be part of the mix in the very short term,” he added.

Private economists say uncertainty over the tax code is having a negative impact on the economy, but argue it should not be overstated.

Scott Brown, chief economist for Raymond James, said he’s heard worries from small business owners and corporate CEOs about uncertainty over tax rates. The uncertainty could lead businesses to put off hiring, slowing an economic recovery.

And, he said, it’s probably a bigger reason businesses are cautious in hiring new workers or making new investments. “A lot is going to depend on the whole economic outlook, and I think that’s the bigger factor,” he said.

Brown said there are investors with cash who are looking for things to put their money in.

While an increase in the tax on capital gains would have some impact on those investments, he said most investors will go forward if they believe they are going to get a strong return. The problem is that right now, a lot of cash “is sitting on the sidelines,” he said.

Brown’s comments track remarks by Moody’s Analytics chief economist Mark Zandi, who has advised Democrats and Republicans on the economy.

Zandi said both parties at all costs should avoid a political stalemate that prevents any of
the low tax rates on middle class households from being extended. Such a scenario could result in a lost decade for the U.S. economy similar to what Japan experienced in the 1990s, he said.

“I think we’d go into a recession if everyone’s taxes rise,” he said last week. “That would be a Japan-like policy error, a very serious policy error.”